Are REITs Doomed To Fall As Rates Rise?

By Michael Aneiro

Are real-estate investment trusts predestined to correlate with bond markets as interest rates rise? Or, since they trade like stocks, can they break free of the influence of interest-rate swings to rise and fall on their own? Last year REITs got hit hard as rates rose, producing the widest gulf in the past 15 years between the REIT performance and broader stock-market performance. In today’s Wall Street Journal, Robbie Whelan explores the questionof whether REITs and bonds march to different drummers:

“The urban myth is that there’s a lock-step correlation between rising interest rates and REIT performance. There are other factors at play,” says Michael Grupe, an economist with NAREIT. “REITs are clearly not [bonds]. A lot of investors may look at them that way, and make decisions based on that, but it doesn’t mean they’re right.”

On the other side of debate are market-watchers such as Green Street Advisors, an old-line research and consulting firm based in Newport Beach, Calif., that has been tracking the industry since 1985.

Mike Kirby, the firm’s chairman and co-founder, says REITs are “hybrid securities” that behave at times like regular stocks and at other times like bonds. The jump in interest rates—and the bear market in bonds—that began in May, he says, was the primary reason that REITs have underperformed the rest of the market.

“REITs march to a different drummer than the stock market,” Mr. Kirby says. “They are a hybrid between fixed income and equities. History shows that when rates spike, REITs fare poorly.”

The story notes that REITs have outperformed the S&P 500 for 16 of the past 24 years, and investors remain drawn to REITs as stable income-producers that pay out at least 90% of their income in dividends. But it calls the high dividends paid by REITs “a double-edged sword,” saying yield-seeking investors flock to REITs in times of low interest rates, but some flee REITs in favor of other high-yielding securities when interest rates begin to rise again, all while rising rates make for rising costs of capital for REITs.

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There are 6 comments

JANUARY 15, 2014 4:03 P.M.

Frank wrote:

Now when are those rates rising again?

You might want to check today's WSJ news: "Christine Lagarde, the head of the International Monetary Fund, warned that deflation in advanced economies threatens to derail a strengthening, but still fragile global recovery this year."

Great comment Frank. Deflation & lack of growth are also being fed by less disposable income due to people dropping out of the labor force, 80% of jobs being created are part time, people having to spend more of their income on Obamacare premiums & deductibles & less on discretionary items, the fracking boom lowering energy costs, bumper corn & soybean harvests, banks holding capital per Dodd Frank & Basel III rather than lending it, perception that Fed turning off QE tap will tighten credit, etc.

JANUARY 16, 2014 9:51 A.M.

Duke wrote:

"yield-seeking investors flock to REITs in times of low interest rates"

-----in that case, expect handsome REIT returns for years to come. The FED will do everything in its power to keep rates historically low. The economy has barely been growing even at these record low rates.

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Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.